Sticker shock at the thermostat: Why heating oil prices are going up
Filed under: Energy, Economy, Investing
Here's a great example of why they're called futures markets and not presents markets: There's plenty of heating oil to go around -- indeed, inventories are at their highest level in nearly three decades -- and yet prices are going up.
Chalk it up to the disconnect between how things are now and how commodity traders bet they'll be in the not-too-distant future. Supplies of heating oil stand about 33 percent above their five-year average, we learned from the Energy Department on Thursday, something that would ordinarily be considered a glut.
Gluts are bad for producers but great for consumers, thanks to the good old law of supply and demand. Barring a sudden sustained blast of Arctic air settling over a chunk of the country, the price of heating oil, if anything, should probably be coming down.
And yet it's getting more expensive. The average national price ticked up 3 percent in just the last week, according to the Energy Department. So what gives? Here's what: Energy traders are putting their blinders on and betting big on a worldwide economic recovery.
"Market pricing is entirely forward looking in terms of the global situation," says John Kilduff, senior vice president of energy at MF Global (MF) in New York, which provides execution and clearing services for derivatives products. "The various aspects of good news are being priced into the economic recovery story, while all the bad news is being discounted."
Heating oil is in the same family of petroleum distillates as diesel fuel, so these commodities trade together. Here in the U.S. we fill our tanks with gasoline, but the rest of the world runs on diesel, Kilduff says. Energy traders see a global recovery at hand and figure demand for diesel will soar.
That's why it's getting more expensive for folks to heat their homes.
Similar forces play a part in rising food prices, we wrote Wednesday, proving two things. One: It's very much open to debate how much futures markets distort prices; and Two: People really like to shoot the messenger.
Fire away.
Chalk it up to the disconnect between how things are now and how commodity traders bet they'll be in the not-too-distant future. Supplies of heating oil stand about 33 percent above their five-year average, we learned from the Energy Department on Thursday, something that would ordinarily be considered a glut.
Gluts are bad for producers but great for consumers, thanks to the good old law of supply and demand. Barring a sudden sustained blast of Arctic air settling over a chunk of the country, the price of heating oil, if anything, should probably be coming down.
And yet it's getting more expensive. The average national price ticked up 3 percent in just the last week, according to the Energy Department. So what gives? Here's what: Energy traders are putting their blinders on and betting big on a worldwide economic recovery.
"Market pricing is entirely forward looking in terms of the global situation," says John Kilduff, senior vice president of energy at MF Global (MF) in New York, which provides execution and clearing services for derivatives products. "The various aspects of good news are being priced into the economic recovery story, while all the bad news is being discounted."
Heating oil is in the same family of petroleum distillates as diesel fuel, so these commodities trade together. Here in the U.S. we fill our tanks with gasoline, but the rest of the world runs on diesel, Kilduff says. Energy traders see a global recovery at hand and figure demand for diesel will soar.
That's why it's getting more expensive for folks to heat their homes.
Similar forces play a part in rising food prices, we wrote Wednesday, proving two things. One: It's very much open to debate how much futures markets distort prices; and Two: People really like to shoot the messenger.
Fire away.
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Reader Comments (Page 1 of 5)
10-15-2009 @ 5:17PM
Iridium said...
One: It's very much open to debate how much futures markets distort prices; and Two: People really like to shoot the messenger.
No there isn't even a debate whether or not the futures market distorts prices. That debate has been closed, shut into a box, and buried under 600 ft of solid rock.
THE FUTURES MARKET OVER THE PAST 6 YEARS HAS DISTORTED PRICES TO THE UPSIDE BY A FEW 100 PERCENT.
A glut of supply would always lead to lower prices. There is no way to counter argue that point. There is also no way an increase in demand could ever support the prices the futures market is trading at currently. A simple demand curve based on historical averages proves this.
Even a two fold increase in demand could only support oil trading at $40 max. There simply is no problem meeting global demand in the forseeable future.
To even float the idea that what is going on in the futures market has anything to do with other than pure manipulation is to enter the realm of total lunacy.
Heating oil stocks are at the greatest level in three decades and the price is going up. Any rational person would be calling for the futures market to be shut down until regulations can be put back in place to prevent the total manipulation of the market.
2002 was the end of the demand based market model. From here on out it is whatever the market can scam the price up to.
Reply
10-16-2009 @ 8:45AM
KNUTE9 said...
Just last week there was a few articles stating how home heating price should remain flat this winter. In one week the news there is going to be sticker shock heating our homes. How much in one week did the oil futures rise in one week? IT'S TIME FOR A REAL CONGRESSIONAL INVESTIGATION (ONE WITH RESULTS). PS: How much oversight is there in the energy futures market, or is it the same oversight Madoff had ! Call you congressman today, and demand answers !
10-16-2009 @ 10:32AM
jay said...
Drill now ,build refinerys(what a novel idea) the american folks are being heared like a bunch of cattle by the government.
10-16-2009 @ 10:24AM
Greg said...
Iridium, are you suggesting that oil demand of 160 million barrels a day would support a $40 per barrel price? Where in the world (literally and figuratively) would the extra 80 million come from?
10-16-2009 @ 12:54PM
mickey said...
They will do anything they can to artificially raise prices when they are supposed to be going down. They don't like it when prices go down. They make prices go up. We are all stupid sheep, lemmings, a$$holes, idiotic morons that sit around and watch all this happen to ourselves and say nothing and do nothing and deserve being slammed because we are stupid and all those rich people laugh at us while they are transferring our money to their possession. When and how will the middle class unite and kick these people in the teeth??
10-17-2009 @ 9:55PM
Jon said...
There's simple explaination for why this is, and for rising gasoline prices, and soon to be everything else. You guys can keep talking around it, but it will not be hidden for very much longer. You NEGECTED to report in your story that the dollar fell by a few % in value over this last week, which led to commodities prices to rise in response. LIKE OIL. Why is the dollar falling? It's whay you get when you have a country which produces virtually nothing the world needs, much less it's own citizens need, plus has NO precious metals to back up it's currency, plus has mountains of debt with no way to pay it back, and a Fed Bank that just prints more money to replace what we can't work to earn, earn to be taxed, and taxed to fix this collapsing excuse of a country. In other words, we are a First World nation, running off of a Third World economy. Hence why we're experienceing something Americans never have. Third World finanacial problems...called INFLATION. Come on, say it with me AOL/Daily Finance... I-N-F-L-A-T-I-O-N. See? That wasn't hard!
10-18-2009 @ 5:38PM
Mindwrencher said...
You are 1000% correct!! This entire lunacy about pricing began with the airlines and their price gouging as departure time approached. Then the hotel/motel industry followed suit, price gouging clients during high occupancy events/seasons. Now everyone is trying to get in the gouging business. Soon, God forbid, the local grocers will not order bread til the last loaf sells....for $200.00!!!!! Then they'll order 10 loaves....and Katie bar the door when they realize they can gouge the hell out of us too!!!!!
10-15-2009 @ 5:37PM
doug said...
JOHN LENNON said it best some forty something years ago . where gonna have a revolution oh ya.may be sooner than we think now !
Reply
10-15-2009 @ 7:01PM
W. C. Peterson said...
The prices are going up precisely because the oil companies have colluded to raise them. George Bush let them get away with it for eight years -- and we saw $4 gasoline on his watch -- and they think they can do as they please. Valero is turning off their refineries for 'economic reasons' -- they can't make huge profits. The oil companies want a return to $4 gasoline and diesel and are prepared to manipulate the market to get it. Obama ought to be prepared to nationalize the oil companies or at least start building 10 large independant refineries to compete with the National Oil Cartel.
Reply
10-17-2009 @ 2:00PM
jessie said...
so by what you said about bush, then the obumble is letting them get away with it now huh
10-15-2009 @ 9:42PM
lin said...
we only need one simple rule for all products. If you don't own or have a current lease for storage for what you are buying you CAN'T buy it.
Reply
10-16-2009 @ 7:43AM
RJ said...
As an Independent voter where is the "CHANGE" as promised from this administration?
Reply
10-16-2009 @ 9:04AM
Sean said...
It's held up in D.C. by the party of "no". Nothing is getting done. No votes, no approval process for selected individuals waiting to take their post. Nothing. The GOP has made it clear, they want Obama to fail. If that means stopping progress, so be it. They are putting all their eggs in one basket. Stop, stall, or slow down the entire process and make it seem like nothing is being done.
It started in Jan 07. Seven vetoes, constant barbs.
10-17-2009 @ 2:05PM
jessie said...
you can't feel that change jingling in your pocket?
10-16-2009 @ 7:56AM
Ron said...
It's nothing more than a grand scale looting, worse, racketeering, operation being foisted upon the consuming public. "Futures" markets are essentially gambling operations with real ability to decimate the present true value price. What needs to be done is that "futures" markets are essentially eliminated, & if heavy handed government regulation is required, so be it. There are only a relative few getting very rich at the expense of the many, and the many are having a very rough "going broke" time. This type of speculation & market control has to stop.
Reply
10-16-2009 @ 8:04AM
OLDS355 said...
Oil prices? LOL!!! I OWN A TRUCKING COMPANY, LAST YEAR WE ATE THE HIGH FUEL PRICES BUT THIS YEAR I WILL PASS IT TO THE CONSUMER AS WILL OTHERS. FOOD PRICES ARE ON THE RISE. WALL STREET PLAYING WITH OIL, BAIL OUT WELFARE HOUSING, AUOT INDUSTRY, ACORN, ECT.. BUT TAKE NO MIND TO OIL PRICES AND HOW ITS DIRVEN BY WALL STREET GAMES. NEVER LEARN. WHEN ALL OF YOU DRIVE BY A STATION ALL YOU LOOK AT IS THE TO GAS PRICE? WELL TAKE A LITTLE EXTRA LOOK AT THAT BOTTOM PRICE, THATS THE PRICE YOU THINK HAS NOTHING TO DO WITH YOU. WELL IT SURE DOES IN THE LONG RUN. SO MY COMPANY WILL!!!! PASS THIS ON TO YOU ALL AND I THINK OBAMA AND CLONES COULD CARE LESS, THE HOUSING IS NOT!!!! WHAT CAUSED OUR PROBLEMS , OIL TOOK OFF FIRST DO TO OUR WALL STREET CULTURE GREED THEN PEOPLE WHO COULD NOT REALLY AFFORD THAT WELFARE HOUSE COULD NOT PAY THERE HEATING BILLS, THE CARDS FELL FROM THERE.HERE WE GO AGAIN, OH!! BOY!!! LOOK AT WALL STREET NUMBERS WHERE DOING GREAT!!! THEY ARE BUT YOU AND ME, WELL YOU KNOW FROM THE PAST YEAR HOWS THATS GOING TO GO LOL. THIS TIME I WILL KEEP MY PROFIT JUST LIKE THE SCUM DOGS IN THIS COUNTRY, NO MORE MISTER NICE GUY TRYING TO DO WHATS GOOD FOR AMERICA. CANT BEAT THEM ,JOIN THEM ,ITS THE NEW AMERICAN WAY, YAAA HOOOO!!! GO FOR CHANGE. SEE YOU ALL AT THE PUMPS,, LOL!!!
Reply
10-18-2009 @ 7:17PM
dan said...
I see you mentioned ACORN, and not the rest of privatized military industrial complex that is ripping the tax payers off............................for billions. ACORN is a drop in the bucket compared to Wall Streets trillions they just scammed you. You righties amaze me in your little narrow view of the world.................your worst than a terrorist your a terrorist capitalist.....just like the bankers who destroyed this country............no better than the those people who thought they were destroying capitalism when they rammed into those two building in NJ. You have a good day....terrorist.
10-16-2009 @ 8:07AM
Charlie said...
Any excuse for raising the price of oil, the little guy just cant win
Reply
10-16-2009 @ 8:17AM
Sandra said...
enough is enough
axis of evil - Wallstreet,Congress and Corporate America
Let the dollar fall, this way, we can't buy any products from China or any other foreign countries. Since our dollar will be worthless we won't need to send aid to others, let China do it.Protectisum( sorry,about the spelling) you bet, because they failed to do just that.
PROTECT- to guard or shield from attack or injury;to shield
That is what the axis of evil party did, fail to protect us (main street) from this mess. They stoled are jobs, homes and right to pursue prosperity.
Reply
10-16-2009 @ 1:09PM
allan said...
what you should do Sandra if you think you have spelled a word wrong is just put (sp) after the word, that seems to keep the spelling nazi's at bay , allan